The Biden administration released the American Jobs Plan, which outlined steps to create jobs at home, rebuild national infrastructure, and increase American competitiveness.
Released March 31, the American Jobs Plan is part of the first phase in Biden’s Build Back Better agenda. This phase focuses on classic infrastructure and will be paid for by tax increases to corporations.
In addition to the American Jobs Plan, this first phase of Biden’s tax plan contains a second package known as the Made in America Tax Plan. According to the plan, this package is intended to “fix the corporate tax code so that it incentivizes job creation and investment in the United States, stops unfair and wasteful profit shifting to tax havens and ensures that corporations are paying their fair share.” The plan does not address how struggling businesses will manage an additional tax burden at this trying time.
Case in point: proposed updates by the Biden administration as part of its American Jobs Plan that would take taxes on global intangible low-taxed income (GILTI) through the roof. On paper, it might look like a straightforward tax rate increase, but the move poses worrying risks to American competitiveness.
Before the 2017 tax reform passed by the Trump administration, U.S.-based multinational companies paid the U.S. corporate tax rates on global profits if they repatriated their foreign earnings.
This policy incentivized corporations to leave their money overseas rather than reinvesting it in the United States. Companies that generated income from intangible sources — drug patents, software, royalties, etc. — found it increasingly beneficial to shelter their profits in lower tax jurisdictions.
GILTI: A background
However, the 2017 Tax Cuts and Jobs Act attempted to coax businesses back by softening tax rules on GILTI. The new tax rules featured a 10.5% statutory rate with a 50% earnings deduction, an exclusion of 10% return on foreign tangible assets, and the ability to pool foreign profits, losses, and tax credits for a company’s U.S. tax bill.
Biden’s GILTI plan proposals
Changes to GILTI play a role in funding the package — Biden’s plan would double the GILTI tax rate from 10.5% to 21%.
This move alone is a hefty increase. Commentators might point out that this is still lower than the regular corporate tax rate of 28%, yet they overlook the fact that the GILTI fine print means the effective tax rate is higher.
Prior to the TCJA, companies could claim a credit of 100% of the foreign taxes they paid against their U.S. tax bill and carry losses both forward and backward. Since 2017, though, GILTI only allows an 80% credit of foreign taxes and has discontinued carry-forwards and carry-backs.
What’s more, the Biden plan would expand the tax base for the GILTI rate. Currently, GILTI exempts the first 10% of a company’s returns on tangible assets.
The thinking behind this exemption was that GILTI originally was supposed to apply to big tech, pharmaceutical companies and other companies whose profits are based on patents from low-tax jurisdiction. The Biden administration aims to cut this exemption, arguing that exemptions reward companies that ship jobs and profits abroad.
Yet this argument overlooks the fact that many companies move operations overseas due to labor costs at home. Increasing GILTI taxes provides little motivation to bring jobs home. Consider businesses with a heavy focus on customer service or industries relying on foreign tangible assets that are not valuable for tax purposes. They’re just as likely as multibillion-dollar corporations to get locked in GILTI’s crossfire, but much more likely to be taken down.
To combat this, the Biden plan proposes a “claw-back” provision to force a company to return tax benefits when it closes down U.S. jobs and sends jobs overseas.
One final reach of the Biden administration’s plan would be to assess taxes by each country rather than pool all taxable overseas profits and credits into a single filing. Consider the effort to calculate tax credits and taxable profits just for one country — doing this for multiple countries would be a compliance headache for the Internal Revenue Service and the affected businesses.
A differing perspective
While Congressional discussions get underway, another line of conversation is stirring from the Treasury Department. Treasury Secretary Janet Yellen has stated an interest in working with the Organization for Economic Cooperation and Development to put forward a global minimum tax to discourage global tax competition.
The OECD hasn’t put forth specific numbers but indicates the global minimum tax would feature a lower statutory rate than the Biden GILTI. Moreover, they’re trying to determine how companies could be allowed to maintain carry-forwards and carry-backs.
It remains to be seen what support either plan of action garners from relevant politicians and constituents alike. But the possibility remains that while GILTI taxes may have started as an anti-avoidance measure, the concept may well produce a backlash.
